CLASS 10 ECONOMICS LESSON 3 - MONEY AND CREDIT

MONEY & CREDIT

•      Money is anything which can be exchanged for any commodities or services that he/she wants. It is anything which helps us to exchange.

BARTER SYSTEM

•      It is an old method of exchange in which goods or services are directly exchanged for other goods or services.

DOUBLE COINCIDENCE OF WANTS

•      A condition in which both parties have to agree to buy and sell each other’s commodities. In this system, What a person desires to sell is exactly what the other wishes to buy.

•      In a barter system, where goods are directly exchanged without the use of money, double coincidence of wants is an essential feature.

•      That is both parties have to agree to sell and buy each other’s commodities.

LIMITATIONS OF BARTER SYSTEM

•      Double coincidence of wants

•      Difficulty of storing value.

•      Differed payments are difficult

•      Some goods are indivisible (inseparable)

DEFINITION OF MONEY

•      Anything which is used as a medium of exchange, store of value and standard of differed payments is called money. It eliminates the double coincidence of wants.

FUNCTIONS OF MONEY

•      Eliminates problem of double coincidence of wants.

•      Transactions are based on time and place.

•      Generally acceptable by people.

•      Helps in multilateral trade.

•      Links countries with countries.

•      Acts as a unit of value.

•      Acts as a store of value.

WHY TRANSACTIONS MADE IN MONEY?

•      A person holding money can easily exchange it for any commodity or service that he or she might want. Everyone prefers to receive payments in money and then exchange it for any commodity/service that they want.

•      Money also called a medium of exchange as it acts as an intermediate in the exchange process.

FORMS OF MONEY

Ø Ancient period: Grains, cattle and other objects used as money.

Ø Medieval period: Metallic coins of gold, silver, copper and lead were used as money.

Ø Modern period: Paper currency and coins are used as money.

MONEY IN INDIA

•      Rupee is the Indian currency.

•      Money has value and accepted as a medium of exchange because it has got the sanction of the Govt.

•      Reserve Bank of India (RBI) is authorized to issue currency notes on behalf of the Govt. of India.

FUNCTIONS OF RBI

·        In India, RBI issues currency notes on behalf of the central govt.

·        Headquarters in Nasik, MH

·        Present Governor General of RBI – Shaktikanth Das

·        As per Indian law, no other individual or organization is allowed to issue currency.

·        The law legalizes the use of rupee as the medium of payment that cannot be refused.

BANK DEPOSITS

•      People deposit their money in banks by opening a bank A/c.

•      Banks keeps the money safe and also provides interest on the deposited amount of money to the depositors.

•      The deposited money can be withdrawn from banks as and when required on demand. Hence, bank deposits are also called demand deposits.

•      Bank deposits also facilitate easy transfers of money through cheques, demand drafts or internet banking.

CHEQUE

•      A cheque is a document issued by an account holder to the bank, instructing the bank to pay a specific amount from the issuer’s account to the person in whose name the cheque has been issued.

•      Advantages:

•      Easy to carry

•      Safest mode of transaction

•      No middle charges/commission involved

MECHANISM OF BANKS

•      Out of the deposits made at banks, they keep only 15% of the total money as cash. This is kept as provision to pay the depositors who might come to withdraw money from the banks. The rest 85% is used to lend loans to people who might approach the bank for loans. The banks manage this cash as they charge a higher interest rate on loans than what they offer on deposits. Thus banks mediate between those who have surplus money (depositors) and those who are in need of money (borrowers). The difference between what is charged from borrowers and what is paid to depositors is the main source of income for banks.

CREDIT

•      Credit (loan) refers to an agreement in which the lender supplies the borrower with money, goods or services in return for the promise of future payment.

•      It plays a vital and positive role.

LOANS

•      Crop Loan: Farmers usually take crop loans at the beginning of the season and repay the loan after harvest.

•      In rural areas, the main demand for credit is for crop production.

•      Repayment of the loan is crucially dependent on the income from farming.

LOAN ACTIVITIES

•      Debt Trap:-  A situation in which the borrower is forced to borrow another loan to repay the first loan. A condition in which the borrower is unable to repay the loan taken.

•      Collateral:- It is an asset owned by the borrower such as land, building, vehicle, livestock etc.; which is kept with the bank as a guarantee against a loan until the loan is repaid.

In case of failure in repaying the loan, the bank would have the right to sell the collateral to recover the loan amount.

TERMS OF CREDIT

•      Collateral security

•      Documentation required

•      Term of the loan

•      Mode of repayment

•      Rate of interest

FORMAL SECTOR LOANS

•      These loans are issued by banks and cooperatives

•      Issuing is supervised by RBI

•      The term period is fixed depending upon the loan

•      The rate of interest is not very high

•      Comprises 52% of the total loans in the country

•      90% rich households (urban) avail these loans mostly

INFORMAL SECTOR LOANS

•      Consist of loans from money lenders, landlords, traders, relatives and friends

•      Not under the control of RBI

•      Rate of interest is viable and high

•      Term period is tentative

•      Comprises 48% of the total loans in the country

•      85% of poor rural households mostly avail these loans.

•      10% of the loans from rich urban households are from informal sectors.

Why do banks and cooperatives need to lend more?

•      Since informal sources of credit have a high interest, it is difficult for households to repay it back. If they lend more, it will lead to more incomes and many people would borrow for a variety of needs. Cheap and affordable credit is crucial for the country’s development. Most loans from informal lenders carry a very high rate of interest and do little to increase the income of the borrowers. Thus it is necessary that banks & cooperatives increase their lending particularly in the rural areas, so that the dependence on informal sources of credit decreases. Everyone should receive loans from banks, not just the rich urban households but also the rural poor.

LOANS FROM CO-OPERATIVES

•      Co-operative societies are small scale organizations formed by people themselves.

•      The members of co-operatives pool their resources in the account of the co-operative and then extend loans to those in need.

•      Co-operatives also take loan from banks.

•      There are several types of co-operatives such as krishak co-operatives, weaver’s co-operatives, industrial worker’s co-operatives etc.

IMPORTANCE OF CREDIT FOR FARMERS IN RURAL AREAS

•      Farmers need credit to buy seeds, fertilizers, pesticides, electricity, equipment etc.

•       There is a minimum period of three to four months between the time when the farmers buy these inputs and when they sell the crop.

•      Farmers usually take crop loans at the beginning of the season and repay the loan after harvest.

WHY ARE THE BANKS NOT ADVANCING LOANS TO THE POOR PEOPLE?

•      Poor people do not have anything to offer as collateral security

•      Banks are not available in many rural areas

•      Banks do not consider the poor people as credit worthy.

•      Poor and ignorant people find it difficult to produce the needed documents.

SELF HELP GROUPS

•      A small organization of rural poor, especially women, who meet regularly and collect their savings.

•      A  SHG has 15-20 members, mostly women of a neighbourhoods.

•      Interest is less than informal sources or credit.

•      Members can take loans form the SHG.

•      After a year or two, if the group is regular in its savings, then it is eligible for availing loans from the bank.

•      Generates self-employment opportunities.

•      Most of the important decisions regarding the savings and loan activities are taken by group members.

•      It decides as regards the loans to be granted the purpose, the amount, interest to be charged, repayment schedule etc.

•      Formation of SHG’s has helped the rural poor to overcome the problem of lack of collateral.

•      It helps women to be financially self-reliant and provide a plat form to discuss and act on a variety of social issues such as health, nutrition, domestic violence etc.

FUNCTIONS OF SHGs

•      It helps in pooling the savings of the members who are poor women.

•      Members can get timely loans for a variety of purposes and at a reasonable rate of interest.

•      It helps the borrowers to overcome the problems of lack of collateral.

GRAMEEN BANK

•      Started in 1970s as a small bank in Bangladesh

•      Formed by Professor Mohammad Yunnus who was awarded the Nobel Peace Prize in 2006.

•      Most borrowers are women and belong to poorest sections of the society.

•      Now it has over 6 million borrowers in about 40,000 villages spread across Bangladesh.

•      These borrowers have proved that not only are poor women reliable borrowers, but that they can start and run a variety of small income-generating activities successfully.